Paying the Boss to Work

The Pennsylvania General Assembly is considering legislation that would allow many Pennsylvania employers to pocket the state income taxes paid by new employees. The plan, House Bill 2626, could come up for a vote in the House Monday.

While billed as an economic development strategy, the bill provides a multi-year subsidy for existing companies to do what they do anyway: fill vacant positions. It is costly and will lead to more cuts to schools and services for children, seniors and people with disabilities.

The Pennsylvania Budget and Policy Center recently put together the following Top 10 reasons why this tax credit plan is a bad deal for Pennsylvania’s taxpayers:

The proposal crosses a line in economic development incentives. New employees are literally paying their employer for the privilege of working. Most tax credits reduce the amount the company pays in taxes. This plan is VERY different, allowing employers to keep 95% of employees’ personal income tax withholdings for five years or longer, even if the company pays no taxes.

Companies would not be required to create new jobs. The original legislation limited the program to companies that moved to Pennsylvania. The current version offers the tax credit to a company that is hiring a new employee – whether that person is filling an existing position or a newly created job. A company simply has to prove that the employee has never worked for the company before and that wage level requirements are being met.

It will drain the state’s largest revenue source. Providing a tax break for new employees rather than new jobs is a costly proposition. In the 2nd quarter of 2012, Pennsylvania had more than 580,000 new hires – that’s over 10% of the state’s workforce – while adding fewer than 300 new jobs. If the income tax dollars paid by hundreds of thousands of workers are diverted to their employers, it will cause a serious fiscal crisis.

A windfall for some companies means larger class sizes, overburdened hospitals and less help for people with disabilities. If employers keep 95% of their new employees’ tax payments, there are fewer dollars available to pay for critical services.

Officials have turned a blind eye to the potential cost. Prudent policymaking requires that elected officials know the cost of a program and weigh that cost against other priorities. The official cost estimate for the bill states the cost is unknown. Most tax credit programs have a ceiling which allow policymakers to plan; this bill does not.

Companies can pay no taxes and still take the credit. Already, more than 70% of Pennsylvania corporations that file pay no corporate net income tax. This program will likely increase that percentage even more. The program has no limit so a company with lots of employees can pocket millions of dollars.

In a tax system riddled with loopholes, it creates yet another way for companies to avoid taxes. Companies could set up subsidiaries to “hire” existing employees – generating tax credits but doing nothing to increase employment. A company using this scheme could actually cut jobs and receive this tax credit – as the subsidiary is considered a brand new “company.”

Corporate tax cuts mean individual Pennsylvanians are paying more. The Commonwealth has reduced corporate taxes by cutting the capital stock and franchise tax, changing the formula for assessing corporate taxes and enacting a host of economic development incentives. Meanwhile, the responsibility for paying for education, infrastructure and other critical services has been shifted to individual taxpayers. The share of the state budget paid for with corporate taxes has declined from 26% in 1991-92 to just 18% in 2011-12.

The Commonwealth already has a job creation tax credit. The original bill was intended to lure companies to Pennsylvania, but it has morphed into a much broader program, now applying to most companies. Pennsylvania already has a Job Creation Tax Credit to incentivize hiring with $1,000 per job created ($2,500 per job if filled by a previously long-term unemployed worker), but the Legislature cut it in half in 2011 because it was underused.

This type of program is notorious for job piracy, not job creation. Proponents of this bill have modeled it on Kansas’ Protecting Employment Across Kansas (PEAK) program, which has been criticized by business leaders in Missouri for giving credits to companies that move 20 miles across the border to Kansas, while keeping the same employees.

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